BUDGET BATTLE SET TO BEGIN ON NEW TERRAIN

By John E. YangBy John E. YangFebruary 3, 1991

This year's struggle over the federal budget, which begins Monday when President Bush sends his fiscal 1992 spending plan to Congress, will be fought on new terrain defined by the pact that ended last year's prolonged battle.

The conflict between the administration and Congress won't be over how much money should be spent, as it has been in the past. That was settled by last fall's agreement. Instead, the conflict will be over how that money should be spent.

Democrats are expected to press for more spending than the administration on health care and children's programs and on rebuilding the nation's roads, highways and bridges. They would pay for the increases by cutting the president's requests for such projects as the space station and the superconducting super collider.

"The real story will be what our priorities will be . . . versus what Congress is for," an administration official said. The administration is expected to argue that its priorities are investments in the future, while Democrats are more interested in current consumption.

One thing that won't change, however, is the ballooning deficit. Last fall's agreement, the product of five tortuous months of bitter and partisan negotiations between White House and congressional officials, was widely hailed as historic -- the biggest deficit-cutting effort ever.

The initial results of the five-year deal are indeed projected to be historic -- the two biggest annual deficits ever. The new budget agreement has acted as a kind of fiscal neutron bomb, leaving the deficit standing but for the time being eliminating the fighting over it.

But the peace won't last. The deal is structured so that the battle over deficit reduction, which will pause for the first three years of the pact, will flare up again in 1993 -- after the presidential election.

Despite its strict limits on most government spending, the agreement allows certain items beyond congressional control to widen the fiscal shortfall over the next two years without penalty. The budget process is safely cushioned from the shocks of the recession, the Persian Gulf War, burgeoning costs of cleaning up the savings and loan industry and looming problems of the banking system. The threat of automatic spending cuts is effectively removed for the next two years.

"We knew there was trouble on the horizon," said House Budget Committee Chairman Leon E. Panetta (D-Calif.), one of the architects of the package. "To some extent the budget agreement was designed to slow down the catastrophe."

"There was a tacit agreement to get the budget issue off the table for the next presidential election," said Rep. Willis D. Gradison Jr. (Ohio), the Budget Committee's new ranking Republican, who didn't participate in last year's negotiations.

The torrent of red ink isn't expected to change that either. Last year's bruising ordeal saw House Republicans revolt against their president after he broke his "no new taxes" campaign pledge, the federal government shut down for lack of funds and the country on the brink of fiscal breakdown. There is little stomach for reopening the politically unsavory decisions of whose taxes to raise and whose benefits to cut.

Some find that frustrating. "We went through an awful lot of hell to get to $300 billion deficits," said Panetta. "I never see the light at the end of the tunnel. Everybody predicts it, but we never get there."

Nevertheless, the budget agreement has transformed the way Congress spends money, changing the Gramm-Rudman-Hollings law from a deficit-control measure to a spending-control law. By slowing the rate of spending growth, the agreement is designed to give revenues a chance to catch up through economic growth.

It makes grand initiatives unlikely. The growth of spending for discretionary programs, those subject to annual appropriations, is tightly restricted. And while benefit programs such as Medicare and Social Security are allowed to grow with inflation and as more people become eligible, any expansions in those programs must be offset either with new taxes or cuts in other programs.

Separate limits are set for military, domestic and international programs. That means that military savings can't be used to finance domestic programs. Instead, domestic programs must compete with one another for funding.

"What you'll get is a lot of tinkering on the edges," said Robert D. Reischauer, director of the nonpartisan Congressional Budget Office (CBO). "Some ox has to be gored if the bull's going to be fed."

Within Congress, the shifting debate tends to diminish the role of the House and Senate Budget committees and increases the importance of the Appropriations panels. Since the pot of money the Appropriations committees will have to work with has already been decided, they needn't wait for a spending outline from the budget committees before divvying it up.

The growing deficit -- projected by the CBO to rise from $220.4 billion last year to a record $298 billion this year and $284 billion next year, not including the cost of the Persian Gulf War -- doesn't mean the budget agreement is a failure, its defenders point out.

Two-thirds of the $482 billion in savings the agreement stipulates over five years already has been enacted into law, including $158 billion in new taxes and $75 billion in cuts in such benefit programs as Medicare, pensions for retired federal workers and farm price support payments.

The problems adding to the deficit -- the war, the recession and the savings and loan mess -- are expected to be one-time, short-lived events. Once those problems are out of the way, the CBO predicts the deficit will improve significantly, dropping to $215 billion in 1993, $160 billion in 1994 and $57 billion in 1995. "The long-range outlook is good," Reischauer said, "but we have to go through a bad short-range to get there."

But it's not certain whether the budget agreement will survive that long. Most congressional budget analysts assume the whole arrangement will be reopened in 1993. Not only will the presidential election be out of the way by then, but that will be when the discretionary spending limits begin to chafe.

Nearly three-quarters of the savings from those programs are to come in the fourth and fifth years of the five-year deal. For instance, the savings in fiscal 1993, which begins Oct. 1, 1992, are calculated at $22 billion. In fiscal 1994 they more than double to $46 billion, and they rise to $62 billion in fiscal 1995.

That's also when the separate categories of military, domestic and international spending will be eliminated. That could rekindle the debate over whether money from Pentagon accounts should be traded off for increased spending on social programs.

Another factor is the current requirement that the Office of Management and Budget adjust the maximum allowable deficit target each year through fiscal 1993 to reflect economic and technical estimating changes. That makes the targets virtually impossible to miss.

But beginning in 1994, the White House has the option whether to make the changes. It could choose to leave the target unchanged, making it virtually impossible to hit and forcing a rerun of last year's brinkmanship budgeting.

"We may well find we have to come back, after we get past the next presidential election, to take another bite out of the deficit," said Senate Budget Committee Chairman Jim Sasser (D-Tenn.).

And even if the agreement isn't formally scrapped, lawmakers and administration officials may be able to come up with enough ways to get around it -- as they did with the earlier Gramm-Rudman law -- to make it ineffective.